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Financial Accounting(INT)
June2015
[Sample study note]
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Content
Exam:
Chapter1 Basis of accounting
(Revision)Chapter1 Questions practice:
Chapter 2 How can we prepare financial statements?
Revision to books of prime entry
Chapter3 Prepare the FS with incomplete records
Revision to incomplete records:
Chapter4 Controlling the booking system
Revision to Correction of errors and suspense account .
Chapter 5 Accounting for payroll
Revision of Accounting for payroll
Chapter6 Single financial statements for limited liability companies
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Exam:
FORMAT OF THE EXAM
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Basis of accounting
Sole trader
One person owns and runs the business.
The sole trader and the business are legally the same entity and therefore the sole trader
is personally liable for any business debts.
Partnership
Two or more persons owns and runs the business.
The partners and the business are legally the same entity and therefore the partners are
jointly liable for any business debts.
Management accounts
These are producedwhen a business wants them. They are produced for internal use and
will not, usually be seen by external people. Management accounts can be prepared using
the companys own internal policies.
Financial accounts
These accounts are usually produced annually. They are based on historical information
and are rarely used internally. Financial accounts are used by external users for several
reasons:
-Investors
-Lenders
-Employees
-Government
-Public
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Principles:
1, DR must have a CR
2, the balance for DR&CR should equal
Eg:
I put $20,000 cash into the business.
DR cash 20,000
CR Capital 20,000
DR Drawings 3,000
CR Cash 3,000
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D: Liabilities=Assets-drawings+openingcapital+profit
Answer: C
Equity= share capital + retained earnings-drawing
7, A sole trader puts $3,600 of cash into the business bank account. Which elements of
the accounting equation will change due to this transaction?
A: liabilities and capital
B: Assets and capital
C: Profit and drawings
D: Assets and drawings
Answer: B: DR cash 3600 CR equity 3600
8, A sole trader purchases a new computer for use in the business for $6,000 cash.
What will the impact on assets be?
A: increase $6,000
B: Decrease by $6,000
C: No change
D: Increase by $9,000
Answer: C
DR PPE 6000 CR cash 6000
9,what is the double entry for a business selling goods on credit for $8,900?
DR
CR
$
$
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Answer:
Long term loan
Deferred tax liability
Deferred payment
11: Working capital is another term for net assets. True or false?
Answer: False.
Net asset= equity
Working capital= net current assets[current assets-current liabilities]
Answer:
Return is a reward for investment in a business.
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Statement of account.A document sent out by a supplier to a customer listing all invoices,
credit notes and payments received from the customer showing how much the customer
still needs to pay for supplier.
Debit note.
A document sent by a customer to a supplier in respect of goods returned or an
overpayment made. It is a formal request for the supplier to issue a credit note.
In simple words, for customer, please give me money.
Credit note.
A document sent by a supplier to a customer in respect of goods returned or overpayments
made by the customer. It is a negative invoice.
A creditnote is issued in various situations to correct a mistake, such as when
(1) aninvoice amount is overstated,
(2) correctdiscount rate is not applied,
(3) they do not meet the buyer's specifications and are returned.
In simple words, for supplier, Ill give you money.
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Remittance advice
A document sent to a supplier alongside any payment sent to them. It details which
invoices are being made.
In the real practice, the supplier sent you the invoice telling you how much you should pay
and after the payment you can send them back a remittance advice telling them about the
payment information:
Account Number :
Currency:
Invoice Number :
Invoice Amount:
Receipt.A written confirmation that money has been paid. This is usually in respect of cash
sales, eg a till receipt from a cash register.
NOTE:
Data about sales transactions recorded in an accounting system comes from:
1,sales invoice
2,credit notes
3,payments by customers(cheque or remittance advice)
4,receipts(sellers copy) in cash sales
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We can use journals to record all business transactions but the volume is HUGE
especially for big companies.
Then what we do is to post all trasnactions into the books and only record the total
figure from each books to ledger account.
The common books of prime entry and the types of transaction recorded in them are:
Sales Day Book (SDB)
Journal
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Invoice no.
Customer
Net Sales
Tax
Gross
Credit note
Customer
Net Sales
Tax
Gross
Invoice no.
supplier
Net purchase
Tax
Gross
Credit note
supplier
Net purchase
Tax
Gross
Narrative
Bank
Receivab
Cash
les
sales
Payables
Rent
Capital
Discount
Allowed
Narrative
Bank
Van
Disocunt
Received
Date
Narrative
Cash
Postage
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Step3post to Ledger
All SFP elements such as ASSETS, LIABILITIES, EQUITY would have a closing balance
carried forward to next years opening balance.
But P/L elements such as income and expense would not have a closing balance.
Examples of accounts included in the nominal ledger
Plant and machinery at cost (non-current asset)
Motor vehicles at cost (non-current asset)
Plant and machinery, provision for depreciation (liability)
Motor vehicles, provision for depreciation (liability)
Proprietor's capital (liability)
Inventory raw materials (current asset)
Inventory finished goods (current asset)
Total receivables (current asset) often called sales ledger control account
Total payables (current liability) often called purchase ledger control account
Wages and salaries (expense item)
Rent (expense item)
Advertising expenses (expense item)
Bank charges (expense item)
Motor expenses (expense item)
Telephone expenses (expense item)
Sales (income)
Total cash or bank overdraft (current asset or liability) often called cash control
account
Petty cash (current asset)
Step4: Trial Balance
DR
CR
Bank
Capital
Sales
Purchases
Payable
Rent
Van
Receivable
Petty cash
Stamps
Total
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Step5: adjustment
Year end inventory journal
Sales
-Cost of sales
Opening inventory
+purchases
-closing inventory
Gross profit
Other income
-expenses
Rent
Stamps
Profit before interest and tax
Interest expense
Profit for the year
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Accumulated
depreciation
$
Carrying value
$
and
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Since weve looked at how to prepare the financial statements and the petty cash book
we can then have a detailed look at the imprest system concept within the petty cash
book.
Receipt
Date
100
Narrative
Cash
Postage
12.11.2010
Cash receipt
13.11.2010
Stamps
10
10
Total
10
10
In practical world, we always need to keep a float amount of money within the business
so that we can use these money to buy bits and pieces, eg, biscuits whenever we want
without withdrawing from the bank each time.
So for the imprest system: (3steps/characteristics)
Step1: decide the float amount:$100;
Step2: receipt will be recorded in petty cash book as $100; payment for expenditure
will be recorded in petty cash book as well and any expenditure and receipt must have
a voucher. float amount=cash in tin +vouchers
$100
= $90
+ $10
Step3: The amount used is restored on a regular basis to the float amount.
DR petty cash $10
CR Bank
$10
Petty cash
DR
Bal b/f(float)
100
Bank
CR
vouchers
17
Bal c/f(float)
100
17
117
117
Bal b/f(float)
100
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Answer: D
Imprest=maximum limit of petty cash to keep
Imprest system
Sundry purchases
(22)
Loan
(10)
(19)
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Cash in hand
66
By mistakes the milk was recorded as $25 and as a result a cheque for $175 was
written to top up the petty cash float. The error made will result in the following:
A: an understatement of expenses of $27 and the petty cash balance being $75 less
than it should be.
B:an understatement of expenses of $27 and the petty cash closing balance being $27
less than it should be.
C:an imbalance in the trial balance of $27 and the petty cash balance being $27 less
than it should be.
D:an imbalance in the trial balance of $95 and the petty cash balance being $75 less
than it should be.
Answer: B
Correct:
Amount left= 450-52-100-50=248
So money should be drawn from bank: 450-248=202 (DR petty cash)
Wrong:
Amount left= 450-25(mistakes)-100-50=275
So money should be drawn from bank: 450-275=175 (DR petty cash)
So:
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CR
450
Bank
652(450+52+100+50)
Milk
52
Postage
100
Window
50
652
652
Wrong situation:
DR
Petty cash
CR
450
Bank
627(450+25+100+50)
Milk
52 25
Postage
100
Window
50
625
625
5,Jeremy purchased some goods for resale. These goods had a list price of $3000 and
Jeremy was offered a discount of 10% if he paid within 30 days. Assuming he paid
within 30days, what was the correct entry to record the transaction?
A:debitpurcahses $3000, credit cash $2700 ,credit discounts allowed $300
B:debit purcahses$3000, credit cash $2700 ,credit discounts received $300
C:debit purcahses$3000, credit cash $3000
D:debitpurcahses $3000, credit cash $2700 ,credit cost of sales$300.
Answer: B
DR purchase 3000
CR cash 2700
CR income(discount received) 300
6, which of the following could appear on the credit side of receivable ledger control
account?
1,sales
2,discounts allowed
3,irrecoverable debts written off
4,cash receipts from customers
5,dishonouredcheques
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A:1,2,3,4
B:2,3,4
C:all
D:2,3,5
Answer: B
In what situations that the receivable balance would be reduced?
1: sales: increase receivable balance
2: Discount allowed: reduce receivable balance
3: irrecoverable debts written off: receivable balance
4: cash receipts from customers: DR cash Cr receivable: reduce receivable balance
5:dishonored cheque: increase receivable balance because there is no sufficient funds
from customers bank account and hence customer hasnt paid for us yet.
7,Which of the following could appear on the debit side of a payables control account
1,purchases
2,cash paid
3,disoucnts received
4,interest paid on overdue accounts
A:1,4
B:2,3,4
C:2,3
D1,3,4
Answer: C
In what situations that the payable would be reduced?
1,purchases : DR purchase CR payabale and increase payable balance
2,cash paid : DR payable CR cash and hence decrease payable
3,disoucnts received: DR payable DR income-discount received : decrease payable
4,interest paid on overdue accounts: DR interest expense CR payable
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9, which of the followings Is the correct posting of sales day book totals?
A:credit payables, debit purchases, credit sales tax
B:debit receivables, credit sales, credit sales tax
C:credit receivables, debit sales, debit sales tax.
D:debit receivables, credit sales, debit sales tax
Answer: B
Sales day book
Date
Invoice no.
Customer
Net Sales
Tax
Gross
DR receivable
CR sales
CR VAT liability (sales tax)
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11,
Payables ledger control a/c
DR
Purchases
Contra
Payment to suppliers
$
16,000
6,000
20,000
CR
$
balance b/f
42,000
discounts received
500
42,500
Answer: 31500
Opening payable (CR) 42,000
Purchases: DR purchase CR payable 16,000
Contra: DR payable CR receivable 6,000
Payments to suppliers: DR payable CR cash 20,000
Discounts received: DR payable CR income(discounts received) 500
Payable (closing) 42000+16000-6000-20000-500=31500
12, Tom sells goods on credit to Amy with a list price of $10,500. Amy received a 10%
trade discount from Tom as well as a further 3% discount if Amy paid within 14 days.
Assuming Amy paid within 7 days, what is the amount to be presented in the statement
of profit or loss of Tom for discounts allowed?
$____
Answer: 283.5
List price
10,500
(1,050)
9,450
(283.5)
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13,
Your organisation sold goods to PQ for $800 less trade discount of 20% and cash discount of 5% for
payment within 14 days. The invoice was settled by cheque five days later. What is the double entry for
the cash discount allowed?
Answer:
DR Expense(Discount allowed) [$800 X (1-20%) X5%] 32
CR Receivables control account
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14,
The following totals appear in the day books for March 2013.
Answer:
38,000
Cost of sale
Opening inventory 3000
Purchases
20,000 4000(return outwards)
Closing inventory (3000)
(16,000)
Gross profit
22,000
Gross profit is not net profit so we dont need to consider the tax effect.
Return Outwards:
Faulty or wrong goods that the business returns back to suppliers
Record in purchase return day book. [DR note]
Explanation: when you return goods back to suppliers, the amount you owe them
reduces as you do not have to pay for the wrong items. You will also have to open a new
ledger account for return outwards.
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Return Inwards:
Faulty or wrong goods that the customers return back to the business
Record in sales returns day book (CR note)
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[ALP]
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Accounting equation:
Assets=liabilities+capital
So:
Assets-liabilities=capital
Net assets = opening capital+capitalintroduced+profit-drawings=closing capital
Missing profit:
Mannys statement of financial position at 31 December 2011 shows that the business
has net assets of $5,000.
The statement of financial position at 31 December 2010 shows that the business has
net assets of $8,000.
Mannys drawings for the year amounted to $2,500
She didnt introduce any further capital in the year.
Required:
Calculate the profit for the year ended 31 December 2011.
Answer:
Op capital
Capital introduced
Profits [balancing]
Drawings
Closing capital (net asset)
5000
5500
(2500)
8000
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Answer:
Way1:
DR receivable 50,000
Dr cash 45000 CR receivable 45000
DR P/L-irrecovable debt 5000 CR receivable 5000
SO: 50,000-45000-5000=0
But closing balance of receivable=55000 So it should be DR receivable 55000 CR sales 55000
Way2:
Or:
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